FENG LISHE v. XU ZHIQIANG

HCA 2178/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2178 OF 2015

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DECISION

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A. INTRODUCTION

1.  These actions concern payments made to the defendant in both actions (“Xu”), alleged to be made because of misrepresentations made by Xu to the plaintiff (“Feng”) in HCA 2178/2015 (“the 2178 Action”) causing such payments to be made by Feng or the plaintiff (“China Art”) in HCA 2543/2015 (“the 2543 Action”).  I shall call Feng and China Art collectively as the plaintiffs.

2.  It is not in dispute that:

(1) Xu and Feng met for the first time in early 2014. 

(2) At that time, Xu was a substantial shareholder of China Art, a company incorporated in Macau.

3.  According to the plaintiffs:

(1) Feng made known to Xu around the time they met that he wanted to acquire an investment bank and other investments. 

(2) Xu told Feng that he owned China Art, which was an external working platform of some departments of the People’s Liberation Army (“the PLA”) of the People’s Republic of China (“the PRC”), that it was applying for and would soon be granted a banking licence in Macau by reason of its PLA background, and that with the banking licence granted China Art would be worth HK$30,000,000. 

(3) Relying on the said representation, which the plaintiffs say to be untrue, Feng purchased 65% of the issued capital of China Art for HK$19,500,000.[1]  In order to prove his connections and wealth, Xu showed Feng various proofs of fund, supposedly issued by HSBC showing deposits in billions of US dollars but were in fact forgeries, as well as other documents supposedly showing Xu to be representing the Chinese Government in talks with the Governments of Madagascar and the Comoros. 

(4) After the purchase of shares in China Art, by making various misrepresentations, Xu asked Feng or China Art (via Feng) to make various payments to him under various pretexts, such as to pay for administration expenses for the banking licence application and operations of China Art, to compensate him for exchange losses and/or bank charges because he needed to transfer billions of US dollars back to Hong Kong and Macau from overseas for fund proof purposes, to purchase a corporation called Tian Di Zheng Qi Group (Macao) Co Ltd (天地正氣集團(澳門)有限公司) (“Tian Di”), which in turn owned substantially Han Di Banking Corporation Limited (漢帝銀行股份有限公司) (“Han Di”), which would soon be getting a banking licence in Mainland China, to pay for the promotion and development of three subsidiaries owned by China Art which would benefit its banking licence application, to purchase a company called Sincere Ease Insurance Limited (誠安保險股份有限公司) or a subsidiary thereof (together “Sincere Ease”) which had a wide range of business, and to pay for a company called World Unionpay Insurance Group Shares Company Limited (世界銀聯保險集團股份有限公司) (“World Unionpay”).

(5) They subsequently discovered that none of China Art, Tian Di, Sincere Ease and World Unionpay had any businesses and there was no application for any banking licence to carry out any regulated activities in Hong Kong or Macau, and the three subsidiaries and Han Di did not exist.

4.  The Statement of Claim in the 2543 Action refers to the following seven payments:

Number	Date of payment (about)	Sum	Pleaded particulars
1	04.04.2014	HK$2,000,000	Loan from China Art to Xu for administration expenses of China Art for the purpose of applying for a banking licence (§10 of the SOC in the 2543 Action)
2	05.05.2014	HK$1,900,000	Compensation for exchange loss and charges for transferring overseas funds to Hong Kong and Macau to prove availability of funds for bank licence purposes (§25 of the SOC in the 2178 Action; §12 of the SOC in the 2543 Action)
3	23.06.2014	HK$100,000	Purchase of Tian Di (§29 of the SOC in the 2178 Action; §17 of the SOC in the 2543 Action)
4	20.08.2014	HK$2,000,000	Payment for the promotion and development of three subsidiaries of China Art (§21 of the SOC in the 2543 Action)
5	22.09.2014	HK$600,000	Purchase of Tian Di (§29 of the SOC in the 2178 Action; §18 of the SOC in the 2543 Action)
6	04.12.2014	HK$5,800,000[2]	Purchase of Tian Di (§29 of the SOC in the 2178 Action; §19 of the SOC in the 2543 Action)
7	09.01.2015	US$1,000,000	Purchase of Sincere Ease (§36 of the SOC in the 2178 Action; §27 of the SOC in the 2543 Action)

The total of these sums were HK$12,400,000 and US$1,000,000.

5.  I note that for payments 2, 3, 5, 6 and 7, each of Feng and China Art has made a claim therefor in their respective Statements of Claim.  However, by amendments made to his Statement of Claim (see §14 and Section D below), Feng is no longer claiming for such payments, save that, by the amendment, he appears now to be claiming for payment 1, in addition to other payments he allegedly made to Xu.  Thus, for the seven payments which concern me now, save for payment 1 (which is being pursued by both Feng and China Art), they are all being claimed solely by China Art.  

6.  The payments now being pursued by Feng in his action (after amendment) relate to his purchase of shares in China Art from Xu, and to banking expenses allegedly said by Xu to have incurred as a result of him pulling funds from overseas.  It is alleged that each of those payments were made pursuant to a series of contracts between Feng and Xu regarding China Art.  The representations allegedly made by Xu regarding China Art’s business, application for a banking licence in Macau, worth, and relationship, are all alleged to be negligent misrepresentations, pursuant to which Feng made the payments.  Xu had acted in breach of contracts and Quistclose trust and had made misrepresentations, causing Feng loss and damage.

7.  In the 2543 Action, China Art claims that it made the various payments relying on the negligent misrepresentations of Xu, and has suffered loss and damage as a result.  Further, Xu had acted in breach of the fiduciary duties he owed to it.

8.  In his Defences to the two actions, Xu alleges that:

(1) China Art was in the business of provision of management and consultancy services in relation to the collection, valuation, exchange and trading of art pieces.  Feng became the controller and directing mind of China Art after his acquisition of the majority of its shares in April 2014.

(2) It was Feng who expressed to him an interest in investing in various infrastructure and art projects in Macau.

(3) He told Feng that he controlled China Art.  Feng said he considered purchasing, and did offer to and did purchase, a majority shareholding in China Art as a platform for him to raise funds and make investments in Macau.  Feng said he would bear all the costs and expenses of China Art, and he asked Xu to stay as a minority shareholder and director to assist in the running of China Art.

(4) He did not show Feng any forged documents.

(5) He did not make any representations to Feng regarding China Art and the PLA, or the valuation of China Art, and the veracity of any such representations could be easily verified by Feng in any event.

9.  Regarding the seven payments in question (§4 above), Xu’s pleaded case is as follows:

(1) For payment 1, Xu never received a sum of HK$2,000,000 on or about 4 April 2014.  It was Feng’s own decision to agree to make a shareholder’s loan to China Art for its operational and administrative expenses.  The sum was transferred to China Art’s bank account initially and was repaid by China Art to Feng on 5 May 2014.

(2) For payment 2, Xu denies making any representation that he would need to pay bank charges of HK$3,500,000 as alleged or at all.  Rather, it was agreed between Feng and Xu that China Art would purchase some oil paintings for display (after initially agreeing that a 玉觀音 (ie a jade Goddess) would be purchased), and the sum of HK$1,900,000 was in part payment of such paintings.  In reply, China Art claims that the paintings were worth at most a few hundred dollars.

(3) For payments 3, 5 and 6, Xu denies making any representation regarding Tian Di as alleged.  It was a decision of China Art (with Feng being its directing mind having full knowledge of all the nature and circumstances of the transaction) to purchase, for HK$5,000,000, 95% of the shares in Tian Di, which had obtained the approval of the State Administration for Industry and Commerce for it to invest in 40% of Han Di.  Xu admits receiving payments 3 and 5 for the Tian Di shares.  As for payment 6, Xu admits the receipt of HK$5,800,000 from China Art on 4 December 2014, and HK$1,800,000 thereof was as part payment for the Tian Di shares.  However, Xu does not plead what Han Di was intended to do, or what the balance of HK$4,000,000 in payment 6 was for.  It is also pleaded that Han Di was eventually not incorporated because the required amount of capital had not been raised.

(4) For payment 4, it was agreed between Feng and Xu that a sum of HK$2,000,000 would be transferred from China Art to Xu for administrative expenses involved in the setting up of Han Di.  The alleged representations regarding the three subsidiaries of China Art are denied.

(5) For payment 7, Xu denies making any representations regarding Sincere Ease as alleged.  It was a decision of China Art (with Feng being its directing mind having full knowledge of all the nature and circumstances of the transaction) to acquire the entire shareholding of Sincere Ease.  Xu also denies receiving US$1,000,000 from Feng on or about 14 January 2015 or at all, and does not admit receiving the same from China Art (but I note that China Art does adduce an application for remittance dated 9 January 2015 showing the remittance of US$1,000,000 from its bank account in Macau to an account of Xu in Hong Kong).  It is also alleged that Sincere Ease had a fully paid-up capital of HK$10,000,000,000.

10.  Xu admits that he was one of the two directors of China Art between 4 February 2014 and 16 February 2015, a period which covers all seven payments claimed by China Art.  He also admits that, as a director of China Art, he owed to it the following duties as pleaded by China Art:

(1) To act bona fide in the best interest of China Art.

(2) To act for proper purposes.

(3) To act within his scope of duties qua director.

(4) To preserve and apply China Art’s assets solely for its benefit.

(5) Not to take any personal benefit out of China Art’s assets without its informed consent or to misapply or misappropriate the same for his own profit.

(6) To make full and frank disclosure on connected transactions.

China Art also pleads the following duties, namely:

(7) Not to place himself in a position where there might be conflict of interest between himself and China Art.

(8) To give regular account of China Art’s assets and to disclose all relevant information in relation to the application of its assets.

For (7), Xu does not admit to the use of the words “might be”, and he does not admit (8).

B.   APPLICATIONS BEFORE ME

11.  On 2 November 2015, China Art applied ex parte for a Mareva injunction against Xu.  On the same day, Mimmie Chan J granted a Mareva injunction against Xu in the usual form restraining him from removing assets from Hong Kong up to HK$20,250,000, and from disposing of, dealing with, or diminishing the value of his assets in Hong Kong and Macau.  On 4 November 2015, China Art issued an inter partes summons for an order to continue the Mareva injunction.  By an order dated 6 November 2015, L Chan J (subject to a variation regarding disclosure) continued the Mareva injunction until trial or further order, while adjourning the inter partes summons for full argument.  (The injunction was varied a few times to allow for legal expenses of Xu, which is immaterial to the present hearing.  I am told by Mr Geoffrey Chang, counsel for the plaintiffs, that a total of HK$1,350,000 had been withdrawn from the two accounts frozen as a result of the Mareva injunction so far.)

12.  On 12 November 2015, Xu made an affirmation disclosing his assets as follows:

(1) HK$4,279,990.75 in an account with OCBC Wing Hang Bank as at 11 September 2015.

(2) All the issued shares in a company the sole asset of which was HK$999,990.54 in an account with OCBC Wing Hang Bank as at 20 October 2015.

(3) Sums that were, or were potentially, owed by Feng or China Art to him totaling HK$45,700,000.

13.  The following summonses are before me:

(1) China Art’s summons to continue the Mareva injunction in the 2543 Action, dated 4 November 2015.

(2) Xu’s summons to strike out the Indorsement of Writ and the Statement of Claim in the 2178 Action on the grounds that the Statement of Claim disclosed no reasonable cause of action, is scandalous, frivolous or vexatious, may prejudice, embarrass or delay the fair trial of the action, or is an abuse of the process of the Court.  Alternatively, if the Statement of Claim is not struck out, then the 2178 Action should be consolidated with the 2543 Action, and that Feng should provide security for costs.  This summons was dated 23 May 2016.

(3) A similar summons as the one in (2) above, also dated 23 May 2016, asking for an order striking out the Indorsement of Writ and the Statement of Claim in the 2543 Action on the same grounds as in (2) above, with an additional ground of striking out being that the Statement of Claim in the 2543 Action has not been verified by a statement of truth as required by Order 41A, rule 6(1), of the Rules of the High Court (Cap 4A).  Alternatively, Xu asks for an order for consolidation of the 2543 Action with the 2178 Action and for security for costs from China Art.

(4) Feng’s application to amend his Statement of Claim in the 2178 Action.  The summons was dated 19 September 2016.

14.  Save for the question of the statement of truth in the 2543 Action, the applications to strike out in both actions were taken out on the ground that they relate essentially to overlapping claims. Subject to the question of costs, Xu does not object to Feng’s application to amend the Statement of Claim, which he says was made as a response to the strike out applications by pleading a completely new case against him, and no longer pursues the strike out application, save for the application based on the lack of a statement of truth.  However, that defect has also been rectified by China Art filing on 7 November 2016 (ie the day before this hearing) such a statement verifying the Statement of Claim in the 2543 Action. Thus, again subject to the question of costs, that application is no longer alive.

15.  The parties also agree that the two actions should be consolidated.

16.  Thus, apart from the question of costs in the amendment application and the strike out applications, the live applications before me are:

(1) China Art’s application to continue the Mareva injunction.

(2) Xu’s application for security for costs against China Art and Feng.

C.   MAREVA INJUNCTION

17.  Mr Chang submits, and it is not in dispute, that a plaintiff must show, inter alia,a good arguable case on the substantive claim for a Mareva injunction to be granted: see Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft mbH und Co KG [1983] 1 WLR 1412 at 1417 per Kerr LJ.  Mr Chang goes further and argues that the evidence against Xu is exceptionally strong, that Xu has a zero chance of success in his defence.  On his part, Mr Joseph Wong, appearing for Xu, does not seek to argue that China Art has not shown enough on the merits side on its case at this stage to support the grant of a Mareva injunction. 

18.  In the light of Mr Wong’s fair acceptance, I do not need to go further into the merits of the plaintiffs’ substantive claim, ie the question of good arguable case, regarding the continuation of the Mareva injunction, save to observe that I do not share Mr Chang’s views, at this stage, as to how “overwhelming” his clients’ case is. As submitted by Mr Wong, the alleged misrepresentations were all said to be made orally, which Xu denies.  In my judgment, having taking into account all the evidence including all the documents relied upon in support by the plaintiffs, the circumstances of the making of each of the seven payments require detailed consideration at a trial having regard to the evidence of inter alios Feng and Xu.  I do not think I can reject Xu’s explanation out of hand now.  There are many factual issues which I cannot, and need not, resolve at this stage on affidavit evidence. 

19.  Further, I do not have any regard to any actions taken, or intended to be taken, by law enforcement authorities in Hong Kong and Macau against Xu so far, which Mr Chang has referred me to, because, quite apart from the fact that there are some disputes as to what in fact happened in that regard, merely because Xu might be under suspicion by those authorities (or might even have been arrested or with an arrest warrant issued against him), that does not mean that that is proof, or in any way probative, of even an arguable case against Xu.  Those actions only reflect the views of the authorities on the materials before them.  I have to deal with the evidence and arguments before me. 

20.  I shall deal with the arguments raised by Mr Wong in support of Xu’s case that the Mareva injunction should be discharged instead, which are as follows:

(1) There are at least two instances where evidence relied upon by China Art at the ex parte stage was fabricated by it.

(2) China Art failed to make full and frank disclosure at the ex parte stage.

(3) China Art has failed to show any urgency in taking out the application on an ex parte basis and, related to that, it has failed to show any real risk of dissipation of assets by Xu.

(4) China Art has failed to comply with its undertaking to provide further information as required under the ex parte order of Mimmie Chan J of 2 November 2015.

C1.   Fabrication of evidence

C1a.  Macau police investigation

21.  The first allegation of “blatant fabrication” of evidence by China Art relates to the investigation of Xu by the Macao Judicial Police (“the MJP”).  Mr Wong refers to Feng’s evidence at the ex parte stage that Xu had been arrested by the MJP, and, after being disputed by Xu on this, then says in a later affirmation that Xu is “a suspected person” and “will be arrested and interrogated once he sets foot on Macau”.

22.  This last statement that Xu was a suspected person and would be arrested once he set foot in Macau is not said to be materially false by Xu.  I would assume that that was the correct position, and if so strictly speaking the statement that Xu had been arrested by the MJP is untrue.  However, in the absence of any reasons given by them for the grant and continuation of the Mareva injunction, I am not sure what weight, if any, Mimmie Chan J or L Chan J put on the originally incorrect statement.  I myself would have taken no notice of that: see §19 above.  Further, in so far as the statement was made, as Xu argues, to put him a bad light, then even though the statement that he had been arrested is untrue, for the said purpose that may not have a real material difference in effect from the statement that he is a suspected person and will be arrested, and there is no material before me to suggest that what Feng did was a deliberate blatant attempt to “fabricate” untrue evidence.  Thus, while I am not taking lightly the fact that an untrue statement, on the assumption that the correct position is as stated by Feng in his later affirmation, might have been placed before the Court, for whatever reason or for whatever purpose, I would not discharge the Mareva injunction on this ground.  It is therefore not necessary for me to decide if what is the true position regarding the arrest or otherwise of Xu.

23.  On a related theme, Xu also makes the allegation of fabrication of evidence relating to a certificate (證明書) issued by the Ministério Público (檢察院) of Macau in relation to Xu and produced by Feng in his third affirmation of 23 June 2016 (ie not before Mimmie Chan J or L Chan J).  Mr Wong says that there are three problems with it:

(1) The certificate has a registration number (報案記錄編號) 1285/2015, whereas in Feng’s evidence he refers to an Investigation Case number of 5270/2015.  But in my view the simple answer is that both of those two numbers appear on the document which Feng produces: the number of 5270/2015 appears on the face to be am investigation file number (偵查卷號) which seems to me to be a different number for a different purpose than the registration number.  Certainly I would not draw the inference that Feng has fabricated evidence because of the two numbers.

(2) Feng only exhibits the first and the last page of the certificate on the basis that a full copy of it is not exhibited as it contains a lot of information regarding Xu’s criminal case.  It is said that an inference could be drawn that the document contained information adverse to Feng or China Art which they choose to withhold from this Court deliberately. But this submission overlooks the fact that in his affirmation Feng also says that he is in possession of an original of the document and would show it to the Court where necessary.  Whatever view one takes as to whether Feng ought to have produced the full document in the first place, this admission of the possession of a full copy and the offer to show it to the Court where necessary put pay to the argument that there is a deliberate attempt to withhold or conceal the document from me.  If those acting for Xu think that there might be materials there which would be adverse to the plaintiffs, they can ask for the full copy (if they do not have a copy themselves) and to show any such adverse references to the Court.  I do not think that the suggested inference could or ought to be made.

(3) On the face of the document, it does not show that Xu was a suspected person liable to be arrested once he set foot in Macau.  While that is true, that does not mean that the evidence of Feng on this made on affirmation is fabricated.

C1b.  Tampering with bank statements

24.  The second allegation of fabrication relates to the bank statements of China Art from May 2014 to February 2015.

25.  At the ex parte stage, Feng produces a copy of those statements with handwritings in Chinese about the use or purpose of some of the items thereon (exhibit “FL-13”).  It is said on behalf of Xu that the handwritten notes relating to two of those sums (payments 1 and 2) had been erased, or more correctly covered up by white correction fluid, on the copy produced by Feng, and Xu himself produces a copy of the bank statements with the handwritings not so covered up (exhibit “XZ-8”).

26.  The two material “tamperings” are:

(1) There was a debit of HK$2,000,000 from the account on 5 May 2014.  On exhibit “FL-13”, although the figure is underlined, there was no annotation.  But on exhibit “XZ-8”, there are the words “还馮立社款項”, meaning “repaying Feng”, written next to the figure.  This was, according to Xu, a repayment of payment 1 to Feng.

(2) There was a debit of HK$1,900,000 from the account also on 5 May 2014.  On exhibit “FL-13”, the figure is underlined.  There is then a gap between the figure and the following words: “用复兴之路油画清欠”, meaning “used to pay for sum owed for a painting” called “复兴之路”.  On exhibit “XZ-8”, there are the following additional words in the gap: “請玉观音款項,后”, which taken together with the words that follow, mean “Money for inviting a jade Goddess, later used to pay for sum owed for a painting”.  Xu says that accords with and supports his explanation for payment 2.

27.  I have since the hearing on 8 November 2016 directed that each of Feng and Xu to file an affirmation explaining the whereabouts of the original of the bank statements, and from what documents each of them made their respective exhibits:

(1) By his fifth affirmation, Feng says that when he and Xu first obtained the statements from the Bank of China, Xu gave him a colour copy, took away the original, and said he would be responsible for explaining and providing all the details of each and every transaction.  A few days later Xu gave Feng a marked up copy but with three places of correction covered up by correction fluid.  Meanwhile, Feng says, he also marked up his own copy given to him by Xu when they first obtained the original from the Bank of China.  He says he made the exhibit “FL-13” from those two sets of copies, and the original statements were at all material times within the possession and control of Xu.  He also gives various reasons as to why it would not make sense for him to cover up the relevant wordings.  Feng also produces for my inspection a copy of the bank statements with the actual correction fluid thereon.

(2) For Xu, he has not made any further affirmation as directed by me.  Rather, a legal executive of solicitors acting for him, Mr Wu Hon Fai (“Mr Wu”), affirms that Xu informed him that he was hospitalised in the PRC and was too weak to attend to the making of an affirmation.  I must say that I am not satisfied with this reason for Xu not personally making the affirmation as directed without proper, objective, proof of his medical condition.  In any event, Mr Wu says that he was given a colour copy of the bank statements by Xu when preparing Xu’s third affirmation, and it was from that colour copy that he made exhibit “XZ-8”.  Mr Wu said he asked Xu at the time where was the original, and “was informed by [Xu] that he did not possess or have access to the original but that he was only provided with the Colour Copy sometime after he had left [China Art] in February 2015”.

28.  Although he does not expressly say so, the implication of what Feng says in his fifth affirmation appears to me to be that it was Xu who did the covering up before the copy was given to him, and if so, by now alleging that Feng had tampered with the bank statements, Xu would be deliberately lying to the Court. 

29.  The respective allegations of China Art and Xu against each other are serious allegations of misconduct which can amount to criminal conduct, for which a resolution cannot be made by way of affirmations only in an interlocutory hearing such as the present.  Since Mr Wong does not dispute that China Art does have a good arguable case on the merits, the covered up words do not have an immediate relevance before me on that aspect, and the relevance of the covering up is whether China Art has in the course of making the application for a Mareva injunction misconducted itself in such a manner that I should set aside the injunction.

30.  I do not think that the materials before me allow me to make a finding one way or the other, as there are questions raised by the evidence of both Feng and Xu in this regard, having regard to the level of cogency required (see Re H and Others (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 at 586 per Lord Nicholls of Birkenhead, and Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387 at §§181-193 per Ribeiro PJ).  If I were to resolve this issue by making findings, further detailed investigations are required, including, quote unavoidably, cross-examination of Feng and Xu. However, given the conclusion I have reached below that the Mareva injunction should not be continued, to take up this issue further is both unnecessary and a disproportionate use of time and costs.  I shall therefore say no more on this issue.

C2.   Full and frank disclosure

31.  It is again trite that in making an application ex parte for a Mareva injunction, a plaintiff has a duty to make full and frank disclosure of all material facts, being facts material for the judge to know in dealing with the application.  Materiality is to be judged by the Court and not by the plaintiff or his legal advisers.  See Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1349 at 1356 per Ralph Gibson LJ.

32.  Mr Wong refers to the following matters which he says ought to have been, and were not, disclosed by China Art at the ex parte stage, in breach of the duty to make full and frank disclosure [3]:

(1) There were various resolutions and cheque stubs showing that the payment or transaction in question was a decision of, and/or approved by, Feng or China Art.

(2) The use of HK$1,900,000 (payment 2) to purchase oil paintings for display at the premises of China Art, and Feng has now admitted that Xu did purchase oil paintings on behalf of China Art and bring them back to the office for display.

(3) The complete set of China Art’s business registration records showing all the details of share transfers, share capital increases, and all of its board and shareholders’ resolutions.

(4) The fact that Feng had brought in another investor, a Mr Wang, into China Art and pocketing HK$13,500,000 as a result, thus showing that Feng was making money from China Art and not the poor victim he portrays himself to be.

(5) The credit note showing that Xu had immediately transferred HK$3,500,000 into China Art’s bank account after Feng had transferred the same to him on 5 May 2014.

33.  I shall deal with each point in turn:

(1) I do not see the materiality of the resolutions and cheque stubs.  If the point is to show that Feng and/or China Art decided to, or approved, or were somehow involved in or knew of, the transactions or payments in question, this is beside the point.  The issue is not really whether, for example, Feng or China Art approved or decided to make a payment, which does not appear to me to be in real issue, but why he or it did it: was it because of some wrongful acts of Xu?  It is not that for the payments or some of them, Xu took them without Feng’s knowledge or agreement at all.

(2) While Feng does admit that Xu did purchase and bring back some paintings to China Art’s office, he says that the paintings were of the lowest quality and worth at most a few hundred dollars.  In effect, he denies that the HK$1,900,000 had been so used.  However, I note that, even on the version of the bank statements produced by Feng as exhibit “FL-13”, with some words covered up, there was a reference to the use of the sum of HK$1,900,000 for a painting (see §26(2) above), which is supportive of Xu’s case.  While “FL-13” was already deployed at the ex parte stage, it is well-established that if a matter is material, it has to be brought to the Court’s attention at the ex parte application specifically in the affidavit and/or the skeleton submission, and not simply left to be possibly found in the exhibits: Tiong King Sing v Sam Boon Peng Yee [2011] 5 HKLRD 651at §14 per Chung J.  There is no reference to the handwritten words regarding this sum in “FL-13” in Feng’s affirmation, or the skeleton, used at the ex parte stage, and there is no suggestion that the same was referred to orally at the ex parte hearing.  In my judgment, this matter ought to have been, but was not, mentioned specifically by China Art in the proper discharge of its duty to make full and frank disclosure.

(3) I fail to see the materiality or relevance of the complete set of business registration records, or the details they are supposed to show.

(4) Again, I fail to see the materiality or relevance of the fact that another person had invested in China Art, or that Feng might have made some money out of it, even if true.  That does not impact at all as to whether the money paid out by Feng or China Art was because of some wrongful act of Xu as alleged.

(5) Regarding the HK$3,500,000, this is not one of the payments in issue so its immediate relevance or materiality escapes me.  In any event, Xu’s complaint is that the Court should have been told that Xu, instead of pocketing the HK$3,500,000, in fact transferred it back into China Art’s bank account as shown by the credit note.  However, this is in fact what Feng says.  At §31 of his first affirmation, Feng refers to the sum of HK$13,500,000 being the balance of the purchase price of the shares in China Art, and, after dealing with two sums of HK$5,850,000 and HK$4,150,000, out of the said HK$13,500,000, then says:

“ As to the balance sum of $3,500,000, [Xu] agreed to transfer it back to the China Art account as its operational expenses upon receiving the same”.

Feng has fully disclosed this payment by Xu, whatever its relevance.

34.  In the premises, only one ground of material non-disclosure, i.e. point (2), is made out.  Of course, that does not mean that the Mareva injunction has to be discharged.  I shall deal with the effect of this non-disclosure after considering the other grounds of discharge.

C3.   Urgency and risk of dissipation

35.  Under this ground, Mr Wong argues that it is trite that an ex parte application should only be made on the basis of urgency.  With respect, I disagree.  An ex parte application should only be made where there is a reason for secrecy, and applications for a Mareva injunction, or an Anton Pillar order, or to restrain a threatened breach of confidence, are prime examples of cases which require secrecy and thus justifying an ex parte application.  Where there is a need for urgency but not secrecy, so that the applicant for relief cannot go through the usual process of issuing a summons for a hearing on a return date or on summons day, what the applicant should do is to apply ex parte on notice.

36.  In my judgment, the fact that China Art only applied ex parte for a Mareva injunction on 2 November 2015, more than six months after Feng has supposedly discovered the wrongful acts of Xu (Feng having made a complaint to the MJP on 10 April 2015 and to the Hong Kong police on 23 April 2015, and Xu being arrested by the Hong Kong police shortly thereafter), and about one and a half month after the 2178 Action was commenced by Feng on 18 September 2015 (Xu having acknowledged service of the writ on 29 September 2015), is relevant to the question of delay, and whether there was any risk of dissipation by Xu.

37.  First, on the question of delay, Feng explains that he only discovered that Xu had assets in Hong Kong, namely a bank account with OCBC Wing Hang Bank, in late August or “very early” September of 2015. But that still leaves the time between such discovery and the making of the application for a Mareva injunction at two months.  What is also not explained is why, with Feng himself having issued a writ against Xu on 18 September 2015, no application was made by him for a Mareva injunction, if there was a fear that the assets which by then had been discovered to exist in Hong Kong would be dissipated.

38.  Mr Chang argues that delay is only a factor and the Court would consider whether there is a reasonable explanation for the delay.  But even if I accept Feng’s evidence on this aspect, there is still an unexplained delay between very early September and 2 November of 2015.

39.  Further, in my judgment a much more pertinent point is the impact of this delay on the question of risk of dissipation.  No doubt because of the police reports in April 2015 resulting in his arrest, and the writ of 18 September 2015 which was served on Xu sometime before 29 September 2015, Xu knew that Feng and China Art were “coming after” him, including the taking of actions in Hong Kong.  If Xu was really to dissipate his assets in Hong Kong (or Macau), it seems to me that he would have done so well before 2 November 2015.  If any of the assets disclosed by Xu in his affirmation (§12 above) had not been dissipated between 29 September 2015 and 2 November 2015 (and it does appear that there were still monies in the two bank accounts as at 2 November 2015, from which Xu had made withdrawals thereafter as permitted: see §11 above), then why would they be after, or now?

40.  I have not overlooked the fact that China Art is alleging that the risk of dissipation was and is real because of the unconscionable and dishonest acts of Xu which demonstrate a low standard of morality, and the Court should act to assist victims of “blatant wrongs”.

41.  I accept that if there is a good arguable case in support of an allegation that the defendant has acted fraudulently or dishonestly, or with unacceptably low standards of morality giving rise to a feeling of uneasiness about the defendant, then a risk of dissipation may be inferred by the Court even without specific evidence in that regard: see CAC Brake Co Ltd Zhuhai v Bene Manufacturing Co Ltd (CACV 94/1998; 30 April 1998) at 7 per Mortimer VP; AH Baldwin and Sons Ltd v Sheikh Saud Bin Mohammed Bin Ali Al-Thani [2012] EWHC 3156 (QB) at §31(4) per Haddon-Cave J.  However, that is not an invariable rule, and the Court has to consider all the evidence before it to decide whether a risk of dissipation is shown or can be inferred.

42.  In my judgment, the delay in the making of the ex parte application for a Mareva injunction, when Xu was at all times aware of Feng and China Art pursuing him via the Court and the police in Hong Kong, so that he did have ample time to dissipate his assets in Hong Kong, which consist really of two sums in bank accounts (one held via his wholly-owned company), if he so wished, suggest to me strongly that there was and is no risk of dissipation.  If, however, by then Xu had already removed the money (which does not seem to be the case: see §39 above), then this is a case of locking the stable door after the horse has bolted (Hsin Chong Construction (Asia) Ltd v Henble Ltd [2005] 3 HKC 27 at §29 per Reyes J).  It is in my judgment unlikely that, if there was a risk of dissipation because he is a person of low commercial morality, Xu would not have removed his money well before 2 November 2015 but to take the chance that China Art might not be able to find the bank accounts, when moving the money would have been simple.

C4.   Non-compliance with undertaking to the Court

43.  The Mareva injunction was granted by Mimmie Chan J on 2 November 2015 expressly upon China Art’s undertaking:

“ to file a further affirmation to explain matter regarding

(i) the time of discovery of the alleged fraud on the part of [Xu];

(ii) damage suffered by Feng Lishe; and

(iii) the time of discovery of [Xu’s] assets”.

44.  Mr Wong argues that, even though a second affirmation of Feng was filed in purported compliance, that affirmation did not add anything of substance to what had been said in the first affirmation of Feng, and there was therefore a breach of undertaking by China Art.

45.  I do not intend to set out in detail the comparison between what was said in the two affirmations of Feng, suffice for me to say that I have read the relevant paragraphs carefully.  While there is a significant degree of overlap between the two affirmations, I do take the view that China Art has complied with the undertaking.  In particular, more details have been provided regarding the time of discovery of Xu’s assets, and while relatively fewer additional details have been provided for the first two items, that is because quite a lot of details have been provided for them in the first affirmation already.

46.  I do not think that this ground has been made out.

C5.   Conclusion

47.  For reasons stated in section C3 above, I dismiss China Art’s summons for the continuation of the Mareva injunction, subject to the question of a short extension (see §61 below).  Even though I have also found that there was material non-disclosure regarding the annotations on the bank statements concerning payment 2, I would not have dismissed the summons on that ground alone, having regard to the fact that that only concerns one of the seven payments and the non-disclosure is not of the most serious nature.

D.   FENG’S APPLICATION TO AMEND AND XU’S APPLICATION TO STRIKE OUT

48.  Xu does not object to Feng’s application to amend the Statement of Claim in the 2178 Action as per the draft Amended Statement of Claim attached to Feng’s summons dated 19 September 2016. 

49.  The result of this amendment, which I allow, and of the fact that China Art has now filed a statement of truth verifying the Statement of Claim in the 2543 Action (albeit at the very last minute), is that Xu no longer pursues his applications to strike out the two Indorsements of Claim and Statements of Claim.  However, given the originally overlapping nature of the two actions, with Feng and China Art both pursuing a number of payments at the same time, and the importance of a statement of truth which is not a mere formality (see for example what was said by Rogers VP in Tong Kin Hing v Autron Mauritius Corp [2010] 1 HKLRD 77 at §19), I am satisfied that Xu did act properly in seeking to strike out on those grounds. 

50.  In particular, regarding the statement of truth, Mr Chang argues that as the underlying facts are largely similar in both Statements of Claim, and the one in the 2178 Action is indeed verified by a statement of truth by Feng, the lack of such a statement in the Statement of Claim in the 2543 Action is not deliberate but only a procedural impropriety. However, in my judgment, the problem is precisely because the two Statements of Claim refer to largely similar background facts, but then related plaintiffs each claim for some of the same sums, thereby making them inconsistent in that regard although put forward by the same “camp”, a statement of truth takes on a particular, increased, importance.  To take one example, regarding the receipt of the HK$1,900,000 by Xu on 5 May 2014 (i.e. payment 2):

(1) At paragraphs 24 and 25 of the Statement of Claim in the 2178 Action, it is said:

“ The Defendant further represented that in order to put together his moneys from various bank accounts over the world, the bank charges of Hk$3,500,000 was required.

Relying on the Defendant’s representations and not otherwise, The Plaintiff [ie Feng] paid the Defendant HK$1,900,000 on or about 5^th May 2014 … ”

(2) At paragraph 12 of the Statement of Claim in the 2543 Action, it is said:

“ On or about 5^th May 2014, the Defendant represented to Feng that he would soon have to pull his overseas funds, which were billions of US dollars, back to Hong Kong and Macau, for fund proof purpose. Since he would suffer exchange loss and charges for such manoeuvre, the Plaintiff [ie China Art] should reimburse and compensate him for his loss, in which Feng on behalf of the Plaintiff agreed. Finally, a sum of HK$1,900,000 was transferred from the Plaintiff’s Bank Account to the Defendant’s bank account …”

There is therefore an inconsistency between the two pleaded cases: who in fact paid the HK$1,900,000 to Xu?  Was it Feng or China Art?  Given the fact that a statement of truth is provided in one action but not the other, it immediately raises questions on the truthfulness of the allegations in the latter in so far as there are any inconsistencies.  No doubt one would have taken the verified statement as true rather than the unverified one, if one has to choose between them. Yet, by the amendments to be made, and because the plaintiffs themselves now produce the statements of China Art’s bank account showing that it was from China Art’s bank account that the HK$1,900,000 was paid to Xu, the (then) unverified statement is now taken to be the correct version and not the verified one. This shows to me that the lack of a statement of truth in the 2543 Action is not a mere procedural defect but a matter of real importance.

51.  I am also satisfied that the plaintiffs did not act as expeditiously as they ought to have in dealing with the grounds by seeking to amend (Feng only applied to do so on 19 September 2016, having apparently indicated on around 5 July 2016 that he would do so) and to file the statement of truth (China Art only did so the day before this hearing) in response to the summonses to strike out.  Even though Mr Chang argues that those acting for Xu ought to have written to those acting for the plaintiffs first before issuing the summonses to strike out, which I agree is generally what a defendant ought to do, the problem of overlapping claims was admitted by Feng himself in his affirmation of 5 November 2015, but nothing was done.  Further, given the delay by the plaintiffs in response the issuing of the summonses at some stage would seem to me to be inevitable even if those acting for Xu had written beforehand.  Thus, the fact Xu did not write to those acting for the plaintiffs asking them to deal with the defects before the summonses to strike out were issued on 23 May 2016 is not sufficient for me to deny him the costs of the summonses.  In the premises, in my judgment the correct order as to costs is that:

(1) The costs of and occasioned by Feng’s application to amend the Statement of Claim be to Xu payable by Feng in any event.  It is, however, agreed by the parties before me that there is to be no order as to costs as to the hearing of the summons to amend.

(2) The costs of the striking out application taken out by Xu against Feng be to Xu payable by Feng in any event.

(3) The costs of the striking out application taken out by Xu against China Art be to Xu payable by China Art in any event.

E.   CONSOLIDATION

52.  The parties agree that the two actions should be consolidated.  I will so order.  Even though Xu has made some complaints as to whether Feng and China Art ought to have made the application rather than himself, in all the circumstances I think that this is a pure procedural direction that benefits both sides, and the right order is that costs be in the cause.

F.   SECURITY FOR COSTS

53.  As the Statements of Claim in both Actions will not be struck out, and the two actions will be consolidated, I now deal with Xu’s applications that Feng and China Art provide security for costs.  The applications are made on the basis that Feng and China Art are ordinarily resident out of the jurisdiction, under Order 23, rule 1(1)(a), of the Rules of the High Court (Cap 4A).  Mr Wong has made clear that the applications are not made on the basis that the plaintiffs would not be able to pay the costs if ordered against them.

54.  It does not appear that Feng and China Art dispute that they are both ordinarily resident outside of the jurisdiction.  

55.  In Chinacast Education Corporation v Wu Shaoqing (HCA 1424/2016, 8 November 2016) at §9, I set out the following general principles regarding an application for security for costs, which I shall adopt here:

“ The legal principles regarding the grant of security for costs are not really in dispute, and the following are relevant:

(1) The court may order a plaintiff to give such security for a defendant’s costs of the action as it thinks just. The discretion is very wide and is unfettered.

(2) While there is no inflexible or rigid rule that a plaintiff resident abroad should be ordered to provide security for costs, the court will normally do so because it is ordinarily just to do so.

(3) […]

(4) An application for security for costs is not an occasion for the court to go into the merits of the case in any detail, to do a preliminary run at deciding the ultimate success or failure of the claim, or to resolve arguments on the strength or weakness of a party’s case save for relatively simple cases where on affidavit evidence in an interlocutory application the court can already see that there is a ‘high degree of probability of success’ for the plaintiff (the test or standard adopted by Mr Lam, counsel for the plaintiff, based on Re Greater Beijing Region Expressways Ltd [2000] 2 HKLRD 776 at 794F per Le Pichon J,to which Mr Wong SC, counsel for the 4^th defendant, does notdisagree), in which case the merits of the plaintiff’s case should be taken into account.”

56.  For reasons stated in §18 above, I do not think that this is a case where I can now say that there is a high degree of probability of success for either side.  I shall not take into account the relative merits of each side’s case. 

57.  Apart from saying that their case against Xu is overwhelming, which I cannot agree at this stage, the only real point made by the plaintiffs in opposition to the applications for security for costs is that China Art has a wholly-owned subsidiary in Hong Kong (“the Subsidiary”) with a registered capital of HK$1,046,800.  Presumably that is supposed to represent an asset of China Art within the jurisdiction, but it is not clear to me how that can be relevant to the application for security for costs against Feng.

58.  But even for China Art, the reliance of the existence of this asset is not an answer to the application for security for costs:

(1) There is no evidence of the nature of the business of the Subsidiary or what assets it owns.  There is no evidence of how much it is worth.  The fact that its registered capital is HK$1,046,800 does not mean that it has that amount of money.

(2) As stated by Au-Yeung J in Crane World Asia Pte Limited v Hontrade Engineering Limited (HCA 109, 256 and 462/2014, 5 May 2016) at §20:

“ Security will not be required from a person permanently residing out of the jurisdiction, if he has substantial property, whether real or personal, within it. The property must be of a fixed and permanent nature, which can certainly be available for costs; or at any rate such as common sense would consider to be so. Shares in a Hong Kong private company do not amount to substantial assets within the jurisdiction readily available for costs, because the value of such shares is difficult to ascertain and it is uncertain whether a buyer can readily be found for them.”

59.  I can see no reason why security for costs should not be ordered against each of Feng and China Art.

60.  Xu has submitted skeleton bills of costs in both Actions.  In the 2178 Action, he asks for security for costs in the sum of HK$624,541.66, and in the 2543 Action, he asks for HK$1,063,600, both up to and including the Case Management Conference.  Taking a broad brush approach, and noting that the two actions are now consolidated so that one set of costs would be incurred for most items in future, I shall fix the quantum at HK$320,000 in the 2178 Action, and HK$500,000 in the 2543 Action, to be paid by Feng and China Art respectively within 28 days.

G.   CONCLUSION

61.  I make the following orders:

(1) For reasons stated above, I will not continue the Mareva injunction granted in favour of China Art. However, noting that China Art may disagree and may want to take the question of protection by way of such an injunction further but an immediate discharge of the injunction may render that nugatory or academic (if I were wrong on the risk of dissipation issue), I shall order that the Mareva injunction granted by Mimmie Chan J on 2 November 2015 and continued (as varied) by L Chan J on 6 November 2015 be continued for 14 days from the date of this Decision to preserve China Art’s position.  It is for China Art to decide what applications (if any) it may wish to make in the meantime.  Subject to the foregoing, China Art’s summons dated 4 November 2015 to continue the Mareva injunction in the 2543 Action is dismissed.  Having regard to the fact that not all of the arguments of Mr Wong are accepted by me, I order that 60% of the costs of this application be to Xu to be paid by China Art in any event.

(2) There be order in terms of paragraphs 1 to 3 of Feng’s summons dated 19 September 2016, with costs of and occasioned by Feng’s application to amend the Statement of Claim to Xu to be paid by Feng in any event, with no order as to costs as to the hearing of the summons.

(3) Regarding Xu’s summons in the 2718 Action dated 23 May 2016, I make the following orders:

 (a) High Court Action 2178 of 2015 be consolidated and to be heard together with High Court Action 2543 of 2015.

 (b) Feng is to provide security for costs up to and including the Case Management Conference in favour of Xu, to be paid by Feng into Court within 28 days of the date of this decision, in the sum of HK$320,000.  This action is stayed until such payment is made.  If no such payment is made after 28 days, this action is to be dismissed with costs to Xu.

 (c) Costs of the applications to strike out and for security for costs be to Xu, to be paid by Feng in any event, with the costs of the consolidation application be in the cause.

(4) Regarding China Art’s summons in the 2543 Action dated 23 May 2016, I make the following orders:

 (a) High Court Action 2543 of 2015 be consolidated and to be heard together with High Court Action 2178 of 2015.

 (b) China Art is to provide security for costs up to and including the Case Management Conference in favour of Xu, to be paid by China Art into Court within 28 days of the date of this decision, in the sum of HK$500,000.  This action is stayed until such payment is made.  If no such payment is made after 28 days, this action is to be dismissed with costs to Xu.

 (c) Costs of the applications to strike out and for security for costs be to Xu, to be paid by China Art in any event, with the costs of the consolidation application be in the cause.

(5) All costs order I make is on a nisi basis and with certificate for counsel, and to be taxed with not agreed.

62.  I thank counsel for their assistance.